Day Traders as 'Dumb Money'? The Pros Are Now Paying Attention (wsj.com) 80
Last year, amateur investors took financial markets by storm. This year, Wall Street professionals are watching them closely. From a report: Fund managers who might have once derided small-time day traders as "dumb money" are scouring social-media posts for clues about where the herd might veer next. Some 85% of hedge funds and 42% of asset managers are now tracking retail-trading message boards, according to a survey by Bloomberg Intelligence. JPMorgan Chase in September introduced a new data product that includes information on which securities individual investors are likely buying and selling, as well as which sectors and stocks are being talked about on social media. About 50 clients, including some of the largest asset and quant managers, are testing the product, the bank says. JPMorgan equity traders are also using it to help manage their own risk. "The flow from retail is not something you can ignore if you are a professional investor," says Chris Berthe, JPMorgan's global co-head of cash equities trading. "It's a whole new investor class that has emerged, and it's an investor class that's actually getting themes right."
The shift illustrates just how much the rookies have changed the investing landscape. A year ago, market observers were questioning if the retail revolution would continue. Now many are asking what it will look like this year. After shying away from active investing for much of the past decade, millions of Americans, hunkered down at home because of Covid-19, became day traders in 2020. Enticed by volatile markets and phone apps that made it free to trade stocks, they flocked to social media for investing ideas. That year, they piled into stocks like Hertz Global Holdings. (and ultimately were rewarded when the car-rental company exited bankruptcy). It is estimated that more than 10 million individual investors opened new brokerage accounts in 2020, according to Devin Ryan, director of financial-technology research at JMP Securities. Last year the trends from 2020 accelerated. JMP Securities estimates that a further 15 million Americans signed up for brokerage accounts in 2021. Social-media forums became increasingly used for trading. Some individual investors used their growing numbers to send stocks including GameStop and AMC Entertainment flying. Many newbies relished in inflicting steep losses on some hedge funds and demonstrating that traditional playbooks aren't the only way to win.
The shift illustrates just how much the rookies have changed the investing landscape. A year ago, market observers were questioning if the retail revolution would continue. Now many are asking what it will look like this year. After shying away from active investing for much of the past decade, millions of Americans, hunkered down at home because of Covid-19, became day traders in 2020. Enticed by volatile markets and phone apps that made it free to trade stocks, they flocked to social media for investing ideas. That year, they piled into stocks like Hertz Global Holdings. (and ultimately were rewarded when the car-rental company exited bankruptcy). It is estimated that more than 10 million individual investors opened new brokerage accounts in 2020, according to Devin Ryan, director of financial-technology research at JMP Securities. Last year the trends from 2020 accelerated. JMP Securities estimates that a further 15 million Americans signed up for brokerage accounts in 2021. Social-media forums became increasingly used for trading. Some individual investors used their growing numbers to send stocks including GameStop and AMC Entertainment flying. Many newbies relished in inflicting steep losses on some hedge funds and demonstrating that traditional playbooks aren't the only way to win.
AI Overlords (Score:2)
I think the future is invite-only online cliques that hedgefund managers can't infiltrate too easily. The only way to win against these hedgefunds is to deprive them of the vital information they require
Re:AI Overlords (Score:5, Interesting)
Re:AI Overlords (Score:5, Insightful)
, but they are also by nature much smaller and may have little market effect.
The market effect does not depend on the number of individuals involved, but on the amount of money at stake. There is a power of numbers, but those numbers are usually not on the side of the common man.
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The numbers aggregate into the mass of money required to move things. The risk is NOT the measure, but the "force" that can be applied.
The big boys have been able to do it with ease for a long time, "going it alone".
They've been slow on the uptake that the horde can mass against them to do it now too.
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The numbers can aggregate into a "force" that moves the chart up, but then if they try to actually sell and make a profit, the same force is applied downwards, with no net gain. It is not a valid concept for making money, or for the Little Guy to get ahead. The minority who are most able to say things that move the mob will make money, and the Average Joe will lose that same money.
"Going it alone" might imply doing fundamental research, which is proven to be a more effective way to decide where to invest. H
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The numbers can aggregate into a "force" that moves the chart up, but then if they try to actually sell and make a profit, the same force is applied downwards, with no net gain. It is not a valid concept for making money, or for the Little Guy to get ahead.
There are a few exceptions to this, for example, if you can force someone else to buy your shares at that higher price. This is the point of a short squeeze. Another example is where you have share dilution that saves a company that otherwise would go bankrupt due to liquidity concerns (e.g. I make a ton of money in two weeks but I can't afford payroll tomorrow). Solvency issues (e.g. I will never make enough money to pay back my debt) are not solved by this sort of game. The crowd has to know which sce
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The Little Guy cannot gain the advantage of large amounts of money; it is an absurdist idea.
The monied elite will always retain that advantage. If the Little Guy wants some advantage, it would be somewhere else.
Traditionally that advantage has only been in being able to make trades without moving the price, e.g., being able to bet on small caps with a promising future, where the big investors don't bother because they'd move the price too much to invest enough money to make it worth their time. Warren Buffe
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Or even better, why monitor the public sentiment when you can manufacture it? A couple of bots mass upvoting and posting about a certain direction in the market is guaranteed to start a domino effect, big or small.
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Because that's actively illegal. It still happens to some degree, but its not worth the risk to the actual big guys.
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Or even better, why monitor the public sentiment when you can manufacture it? A couple of bots mass upvoting and posting about a certain direction in the market is guaranteed to start a domino effect, big or small.
Just a warning to everyone: doing this is illegal, at least in the USA.
(I'm not saying the O.P. is wrong. Bots might "work"... just adding an important detail)
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it is still dumb (Score:1)
Most people will still lose in this type of gambling, the crowd either moves in to buy or to sell all at once. Of course this means selling to it and buying from it makes more money than moving with it.
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Indeed. This stunt is very difficult to repeat. It was only because nobody expected is that it worked the first time.
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You are touching on the essential point. There is no "smart" money in stock trading (as opposed to investing) - the distinction is people who have trading advantages over those who don't. Often those advantage are purchased (installing trading systems in the actual exchange data center for example) so it is really "big money" vs "little money" with big money normally having all of the advantages.
Re: it is still dumb (Score:2)
This feels very much like a dumb rock band believing its own press releases.
Probably time to brace for impact.
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This feels very much like a dumb rock band believing its own press releases.
Probably time to brace for impact.
Yeah, the only thing that would cause retain investors to no longer be "dumb money" would be for poor people to suddenly have better investing results than rich people, and it takes a lot more than chest-thumping to make that happen.
"Ugga Wugga Apes Strong! Hodl!" is a pretty stupid press release to believe in if your goal is to grow an investment.
Of course they do. Pros *chase* dumb money. (Score:4, Insightful)
This is the same reason RobinHood et al make money selling trading information to funds.
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I seem to recall recent legislation that makes that revenue stream verboten, but I could be mistaken.
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You are mistaken.
But OTOH, Fidelity doesn't do Payment For Order Flow (PFOF) and they make (a lot) more money than RH, et. al. The reason they use PFOF is it lowers the capital needed to run a brokerage, so they're forgoing part of the profits by handing them off to a middle-man via PFOF.
However, this idea that the information is used by "funds" is absurd. It is used by the market makers, the ones who are paying the PFOF, to know where the bid/ask spread is moving, and to be able to set that spread in a way
Sheesh (Score:4, Insightful)
This isn't because the "dumb money" is actually smart, it's because they know just how dumb that "dumb money" is. They've always paid attention to message boards and hype, it's just now that dumb money is organized and acting together more than ever. The smart money front runs and dumps on those idiots.
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^^^ This.
Can't believe this needs to be explained though.
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^^^ This.
Can't believe this needs to be explained though.
Indeed. The professionals just underestimated once how dumb the dumb money actually is and got surprised by a mindless stampede. That will not happen again anytime soon.
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No stocks have intrinsic value. They are worth exactly what someone will pay for them. No more, no less.
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No stocks have intrinsic value. They are worth exactly what someone will pay for them. No more, no less.
No company has assets, income, or profits? Who knew?
This is a stupid remark masquerading as a smart one. Warren Buffet became one of the richest people in the world by identifying undervalued stocks and buying and holding them.
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Non-sequitur. That the company has stuff does not matter to the stock. I can't trade my stock for company assets, or company income, or company profits.
It's in no way a remark masquerading as anything. It is a simple observation. The very fact that Warren Buffet COULD do that is evidence that the stock has no intrinsic value. If it did, he couldn't do that; he would have to pay the intrinsic value of the stock.
Under or over valuing a stock is a figment, in just about all cases. Just look at what happened to
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Non-sequitur. That the company has stuff does not matter to the stock. I can't trade my stock for company assets, or company income, or company profits.
That's because you're thinking too small. If you buy all the stock in a company, you can do all those things.
It made more sense to do it in the 1930s when value investing was invented as people realized that there were companies who had more cash in the bank than their entire market cap was worth. Buy all (or a controlling share) of the company stock, shut the company down, walk away with the contents of the bank account. You can almost never do that profitably anymore, though, since pretty much every
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The problem is, even if you hold all voting shares, you can not do all those things. You need to jump through a lot of hoops, and while you do, the existing board and C level executives can still do things. Plus, there are a lot of regulations on exactly what you can loot from a publically traded company.
We're not in the 1930's now, which is my point. I am not trying to claim "this has always been the case"; not even that it's the case everywhere. But in Western countries, and where running a business is no
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Warren Buffet is an investor.
He's not a trader.
While both operate in the stock market, it's a VERY different activity.
But you knew that, didn't you?
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As a technical term, yes. But in colloquial terms, and clearly from context, we're discussing what inherent value the stock has. Not the value the stock needs to have for it to be worth investing in for us.
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I doubt that. They should know exactly how much dumb money is there.
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Question is, while the GameStop and AMC things were huge in terms of the profits that some day traders made, are they representative of the long term profits seen by Reddit users?
One thing I've never heard explained is why nobody else did what Reddit did first. Professional traders could see the position GameStop was in and could have done the same thing with some big buys. Honour among thieves or something?
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Because if professional traders do it, it becomes conspiracy to manipulate the market.
Even rich people go to prison for ti and lose their professional licenses and ability to do it again.
It's the one, very small advantage the little guy has in the game.
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Short answer: "They did."
Fidelity made $2.9B.
https://www.investors.com/etfs... [investors.com]
A few day traders made profits that, for them, seemed huge. But it is really "dumb" to think that they've changed who makes most of the money.
It's even dumber to think that public social media posts would somehow shift profits away from the rich. Even if they don't put their hands on any of it, even if they just sit back and watch, they're still going to be making the lion's share of the profits. Let the little guy do the illegal
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The other thing that changed in 2020 is you suddenly had a lot the white collar segment at home where they could watch a handful of positions during they day without any manager walking by and accusing them of 'not working' and whole bunch of people that had not-at-all-targeted covid relief money to 'take the the casino' because they did not need it and could not spend it on any other entertainment hardly.
So you had a lot more 'dumb money' with the time and inclination to chase the hype on the boards.
Really
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Hertz had a low share value until the day they exited bankruptcy, then it spiked.
A lot of institutional investors are not allowed to invest in companies that are in bankruptcy! So the Hertz volatility clearly was not driven by the little guy.
Disclosure: Hertz shareholder
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The smart money front runs and dumps on those idiots.
In other words the "smart money" is not actually smart, it just plays a rigged game. Now one might say that rigging the game is smart, but that is not what claiming to be a "smart trader" means - it is pretending that it is winning by being a brilliant mind playing on a level field, which is a self-flattering (and politically useful) lie.
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In other words the "smart money" is not actually smart, it just plays a rigged game.
Sounds pretty smart to me!
it is pretending that it is winning
Money doesn't stink. It spends the same no matter what stupid insults you throw at them.
self-flattering lie
The money really spends. It's real money.
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The smart money front runs and dumps on those idiots.
Fidelity made $2.9B in one day off of GameStop morons.
"Dumb money" basically shook out all of GameStop's institutional investors in one week. So if they need financing, instead of having it arranged by their investors, their only route is to issue more shares and dilute their new investors. Totally dumb.
https://www.investors.com/etfs... [investors.com]
A bunch of lemmings can still effect the market (Score:3)
They are still dumb money, but a bunch of lemmings can still effect the market. By knowing the game that is being played, other can make money.
If one has enough money pushing up the demand and price on a stock is easy. Selling it for a profit after having done that is hard.
It really feels like a Ponzi scheme, a few probably buy and then talk up the scheme and some of those original few make money by selling into the new suckers purchases.
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It really feels like a Ponzi scheme, a few probably buy and then talk up the scheme and some of those original few make money by selling into the new suckers purchases.
That's not what a Ponzi scheme is. What you described is typically called a pump-and-dump.
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But they have treasury stock (they can sell) and in the case of AMC they proven they can issue new shares the apes snap them up. So actually as long as these guys keep deciding to HODL or BUY BUY BUY they actually won't go bankrupt.
The question is once the massive appreciation stops and the apes keep seen day after day week after week some selling pushing the prices down and down, at what point the damn break and everyone still on board decide they they no longer want to take the chances with the deck chair
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If the stock goes to zero, they MAY be de-listed, but they don't go bankrupt... Unless they also can't pay their bills.
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With a pump-and-dump you have an individual or group who is pumping.
With meme stocks, it is more of a social phenomenon where there is a mob of people pumping, many of whom aren't even positioned to make any money off of it! They're just doing it as a form of socializing.
It's similar to a pump-and-dumb, but also different, and a lot harder to regulate.
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It really feels like a Ponzi scheme
Indeed. The Greater Fool Theory is sortof like a Ponzi Scheme, but it doesn't have a centralized source. There is no individual scammer who is responsible. There is just a lot of Dumb Money in the game!
https://www.investopedia.com/t... [investopedia.com]
Not even remotely new behaviour (Score:1)
Of course the pros are tracking dumb money (Score:2)
if you're a pro day trader, then the ideal scenario is to get in before the herd stampedes. It's investing 101, buy low, before the herd stampedes, and sell high, to the last of the herd who gets screwed. Profit.
Dumb Monkey (Score:2)
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It's a trick demonstration. Money Managers don't make their money by beating the market, they make their money by selling services to clients. The chimp did not actually sell more services, and so wasn't actually as successful at that particular job.
A random walk will approximate buying an index. And they didn't put all the stocks available on the chimp's dartboard; only high quality stocks in the S&P 500!
People who are better than average at picking stocks wouldn't do well to be money managers, they'd
The money is still dumb. (Score:2)
But that doesn't mean one can't profit from the movement.
Day trading, as compared to after-hours trading (Score:5, Interesting)
I read an article recently that pointed out that almost all of the upward movement in the stock market happens in after-hours trading - where retail investors cannot participate. There is apparently a suspicion that the big firms have some sort of algorithms in place that manipulate the market: ensuring that normal people miss out on most opportunities. Sell in the morning, to keep the prices down, buy up again after market close - I'm sure it's more sophisticated than that, but the article's statistics were pretty damning. Only...how do you prove something like that?
It's really no different with HFT: front-running other people's trades, to take the profit out of them. What really needs to happen: the stock markets need to provide a common infrastructure that is used by everyone. If the market is closed, it is closed. No special fiber connections for investment companies.
For that matter, an adjustment to government regulation would help as well. Just as an example: profits from any position held less than 24 hours could be taxed at 100%. Less than an hour, tax at 1000%. That would end HFT, and indeed a lot of speculation.
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Of course. The profits basically all big players make have to come from somewhere. It is the tiny players, the "dumb money" that supply them because they have no clue how the game works.
Also very much agree on how to kill HFT, which would definitely be a good thing.
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I read an article recently that pointed out that almost all of the upward movement in the stock market happens in after-hours trading - where retail investors cannot participate.
There are two obvious problems with this thesis:
(1) After-hours trading is exceedingly "thin". There simply aren't enough trades happening for the profits and losses to be significant to institutional market participants.
(2) If the price is going to go up after hours, it is simple enough for a retail trader to buy during trading hours, and hold the position overnight.
Really there's a simple classical economic explanation for the phenomenon...the principle of risk versus reward. There are significant risks
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Don't confuse the issue with the facts! After-hours trading is PROOF. PROOF I tell you, that they are colluding.
Nevermind I didn't RTFM. It's PROOF guys!
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Of Course They're Paying Attention (Score:2)
When a mark sidles into the room, declares themselves to be a mark, and sits down at the table, the pros pay attention.
The best pros are the ones that manage to convince all these marks that acting in concert in support of somebody not themselves is a "right and just" crusade.
I want me some of that idiot money, but I know myself enough to know I would be a mark, and not a pro... so somebody else takes care of that.
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misleading (Score:2)
"...it's an investor class thatÃ(TM)s actually getting themes right."
Bullshit. The fact of the market is that it doesn't matter how "right" they are, if they act enmasse. If you're a pro, and can read the surf properly, you can take advantage of that.
How wrong they are, or aren't, only defines how big a pile the pros can make off of the herd of sheep trotting around.
Retail learned the algorithms are pretty stupid (Score:2)
Apparently, the main strategy of the hedgies is to induce panic sells by noticing a downward trend and exacerbating it with a short-lived ladder attack.
The reason the hedgies went into full blown panic mode in January 2021 is that apes learned a valuable counter-attack: buy that dip. DCA down, baby!
What's going to be very interesting is to see what happens when all of the naked shorting gets exposed, likely due to a China-driven market crash that causes a wave of margin calls at all sorts of investment hous
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The hedge funds and the retail monkeys play in the muc
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...with a short-lived ladder attack.
There is no such thing as a "ladder attack". People who think they exist base their reasoning on faulty impressions of how bid-offer based electronic markets work.
https://money.stackexchange.co... [stackexchange.com]
https://www.reddit.com/r/inves... [reddit.com]
And the hedge funds won (Score:2)
Anyone who doesn't think the real money wasn't monitoring reddit, etc, esp. by the time the first day of trading was over also believes in unicorns, and I've got a bridge for sale.
https://www.washingtonpost.com... [washingtonpost.com]
This is one of the dumbest articles I've ever seen (Score:2)
"For centuries, humans have thought lions see gazelles as food, and didn't care about the delicious grass the gazelles grazed on. But now, it seems that lions are trying to find out where the gazelles are going, and what types of grass they find most delicious. It just goes to show that gazelles might have some wisdom to teach even mighty lions!"
Gambling: (Score:2)
now more popular than ever.
Warren Buffett (Score:2)
"The stock market is designed to transfer money from the active to the patient.â --Warren Buffett